Higher Rock Education - Economics Blog

Friday, September 16, 2016
On September 1, 2016, the Bureau of Labor Statistics reported that productivity declined in the second quarter of 2016. This is the third straight quarter that productivity has declined. The main reason is probably that businesses have been slow to purchase new equipment. However, there may be some demographic trends that have hurt productivity while making productivity harder to measure.

Productivity is a measure of the efficiency that a machine, system, factory, or person converts inputs into useful outputs. It is the output achieved per unit over a defined period of time. On a microeconomic level, productivity is important for an individual or a company. Productivity directly impacts a person or company's income. On a macroeconomic level, productivity is essential for improving the standard of living for a country by expanding its production potential.

Microeconomic Level and Demographic Trends

I, like many workers, now work a great deal from home. Sometimes I am distracted. It is certainly tempting to sleep in when I stayed up too late watching a movie or ball game. It seems easier to procrastinate when at home. I can't imagine how difficult it would be with chores and children tugging at you! Perhaps the recent trend in working more out of the home has harmed productivity. It is true that conversations around the water cooler were very distracting when I worked in an office environment, but my colleagues held me more accountable. Eventually someone would say, "Time to get back to work." A baby or child doesn't do that.

With these distractions it is more important than ever to build good habits. Read this article from Fast Company for 15 habits that will increase your productivity. Increase your Productivity

Productive workers should earn more because they generate a greater income for their employer. The real median income in the US is still below pre-recession levels according to the US Census Bureau's latest report. This is partially because productivity has not increased. To illustrate, assume an employer offers you $20 to dig a 30 square foot hole in his yard. You do not have a shovel and dig it with a stick and your hands. It takes you four hours to dig the hole to his specifications, so your labor is worth $5 per hour. ($20 / 4 hours) If you had a shovel instead, it may have only taken you 30 minutes to dig the hole. The value of your labor just increased to $40 per hour. Finally, assume a bulldozer enables you to dig the hole in five minutes. Your time is now worth $240 per hour. In each case your productivity increased.

Macroeconomic Level – Why it is Important

Long-term economic growth and improvements in a country's standard of living depend on increasing productivity. Economic growth can be achieved by employing more people, but real wages would remain stagnant without an improvement in productivity. A company or country can increase its productivity by investing in more physical capital, educating its present and future workers, and by developing new technologies.

To illustrate, assume Nuts is a small country which has a population of 1,000 workers. Everyone farms peanuts. Tending the fields is done by hand. Together they produce 200,000 pounds of peanuts annually. Peanuts sell for $3 a pound, so Nut's GDP equals $600,000, or $600 per worker. A tractor is introduced that enables production by the same number of workers to increase to 300,000 pounds. Productivity, the production per worker has increased 50 percent. More importantly, each worker's income increases to $900. The improvement in productivity directly contributed to everyone's well-being.

Now assume Nut's population increases by 100 workers, and these workers produce 20,000 pounds, so the total production of 1,100 workers equals 220,000 pounds. At $3 per pound, the GDP would increase to $660,000, but the income per worker would remain at $600. Only an increase in productivity will increase the well-being of the entire population.

Another way of looking at this is that countries that spend their resources on capital goods and improvements in technology will grow faster than countries where production is focused on consumable goods. If Nuts had not acquired the tractor, it would not have been able to increase its production. In our example, we assumed a tractor was donated. In other words, it did not take any labor to produce the tractor. Let's modify that slightly and assume that the 100 new residents were needed to manufacture the tractor. Nut's GDP would still have increased from 200,000 to 300,000 pounds of peanuts. Furthermore, the standard of living would have increased from $600 per worker to $818 per worker. ($900,000 sales / 1,100 residents)

Economists use the production possibility frontier to illustrate this basic concept. The frontier represents the full potential of an economy. Adding capital goods improves productivity and pushes out the frontier. To learn more about the production possibility frontier and achieving our potential read our lesson Production Possibility Frontier.

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